Non-Compete Agreements Limit Growth

July 23, 2014

New companies are responsible for the majority of net new job creation, but non-compete agreements can keep individuals from moving in and out of jobs, explain Jason Wiens and Chris Jackson in a report from the Kauffman Foundation.

Some companies require their employees to sign non-compete agreements as a condition of their employment, agreements that generally restrict the ability of that employee to work for a competitor for a specific amount of time or within a specific geographic area. The enforceability of these clauses depend upon state law, as some states (such as California) rarely hold employees to the restrictions, while other states (like Florida) strictly enforce them.

Non-compete provisions are important for employers, who seek to protect their ideas, talent and trade secrets. On the other hand, the clauses restrict labor mobility, which in turn makes the labor market less dynamic, hindering growth and the development of new businesses.

According to the report:

Workers in states that strictly enforce non-compete agreements report having lower compensation in their next job.

Firms with non-compete agreements in strictly enforcing states have lower rates of return on capital investment than in states that do not enforce the provisions.

Firms are more willing to pursue riskier research and development strategies, as well as invest in more worker training for employees, when states strictly enforce non-compete agreements.

Workers are less likely to switch jobs when non-compete agreements are stringently enforced.

Wealthier individuals may be less affected by these provisions than other individuals as they wait for the restrictions to expire.

Rather than use non-compete agreements, Wiens and Jackson write that non-disclosure and confidentiality agreements can provide employers with trade secret protections without stifling innovation and growth.